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Weekly View

David Morrison | 03/12/2018 08:21

On Saturday we heard that the US and China had managed to reach a tentative agreement over trade. As a result, President Trump has said that tariffs on Chinese imports to the US will stay at 10% for the next 90 days instead of being raised to 25% on January 1st as previously threatened. Global equities and stock index futures soared on the news as did the Chinese yuan, Aussie and Kiwi dollars and precious metals. The US dollar slipped as investors went back into ‘risk-on’ mode.

Aside from this, the key event last week was Fed Chairman Jerome Powell indicating a narrative change in the Fed’s interest rate policy. Having previously said that US economic strength meant that the central bank was someway short of hitting the neutral rate for fed funds, Mr Powell has now suggested that the Fed is very close to hitting the lower end of the neutral range. Global economic data releases continue to point to weakening and the US won’t be immune to this if it continues. Markets still expect the Fed to raise rates by 25 basis points later this month, but now expect a pause in March next year.

Economic Calendar

This is a very busy week for economic data releases and events. However, the calendar has been complicated as US markets will now be closed on Wednesday for a ‘National Day of Mourning' in honour of former President George H W Bush. This was when Fed Chairman Jerome Powell was due to present his first day of testimony on the economic outlook before the Joint Economic Committee of Congress, in Washington DC.

This week also sees rate decisions from the Reserve Bank of Australia and Bank of Canada together with speeches from several Fed members, the ECB’s Mario Draghi and Bank of England’s Mark Carney. And let’s not forget OPEC meetings on Thursday.

So there’s no opportunity to relax, particularly as Friday sees the release of the US Non-Farm Payroll report for November. Any signs of a slow-down in job creation or a decline in Average Hourly Earnings will reinforce the view that the Fed is preparing to pause or even end its steady series of rate hikes in 2019 and this should weigh on the dollar going into the year-end.

S&P 500 Chart

The easing of US/China trade tensions, even if only temporary, coupled with an apparent dovish pivot from the Fed, has encouraged those traders betting on a classic year-end rally in equity markets. The daily chart of S&P 500 suggests that a double bottom formed between October and November. However, Monday’s early 2.0% pre-open gain opened up a large gap and we now need to see the index break and consolidate above 2815 for confirmation. If the S&P can build on these gains this week then technically at least, the bulls are back in control and will make every effort to drive US equities to fresh all time highs in the New Year.

David Morrison

Early last week the dollar came under selling pressure as traders expressed their uncertainty ahead of the US midterm elections. It continued to weaken after the Republicans increased their majority in the Senate, but lost control of the House of Representatives.

David Morrison

David Morrison

On Wednesday the Bank of Japan kept its key interest rate unchanged at minus 10 basis points and its target for 10-year JGBs unchanged at zero. The Nikkei closed 2% higher while the yen was pretty much unchanged in the session.

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